Pages

Sunday, November 27, 2011

Fear

Being stopped out several times will wreck your confidence and the trader may turn into a victim of fear. Fear is always an immediate emotion and will paralyze you and prevent you from entering viable setups. Often very good setups will move immediately after triggering and your hesitation will cause you to miss out. Fear will make you miss out on many solid trades.

Since good setups will often give a strong entry bar and the entry bar usually grows very quickly after the trade is triggered, you may curse yourself and enter mid-bar, a few ticks or a point above your ideal entry. This also means your risk is now larger by a point or so. This means fear forces you to enter on a large risk.

With a few exceptions a slight pullback after an entry trigger is a normal event and mid-bar entry may cause your stop to be taken out. A trader stricken with fear is unlikely to loosen the stop or add-on (unlike the greed stricken trader) but would probably reverse at the stop. Fear will cause you to be pushed around by every pullback and strong move the market makes.

Reversing every two or three bars will destroy any confidence you still have left in your ability to read market direction and you will get chopped up. Unlike the greedy trader who's account is killed by few large losses, the fearful trader's account dies by a thousand small cuts. If you are fear stricken, you should never reverse a position.

A loss for a fearful trader puts him "on tilt" and he is likely to make more mistakes if he continues to trade for the rest of the day. Fear is rather hard to overcome and the only way out is to realize that every setup has a certain percentage of wins and the remainder are bound to be losses. Some losses will be clustered close enough that it will appear that you have lost your ability to trade that setup. The best approach is to stop trading for a certain number of bars after a loss and stop trading after a certain number of losing trades for the rest of the day. The knowledge that your losses are limited per day in the worst case is a stabilizing force on your psyche.

"Be greedy when others are fearful" is easy to say but impossible to practice since you are the fearful one. The antidote to fear is risk management. Once you understand and accept the maximum losses per trade and per day, you already know how much you will lose in the worst case for any given period of time. If this is something you have already accepted as the cost of trading or learning to trade, fear will be much more manageable.